Moody’s: Lease Expirations to Free Up Cash

Report indicates a reduction in obligations of about one-third by 2018.

Major U.S. retailers have more than $70 billion in lease obligations coming off the table in the next four years, opening up significant opportunities for initiatives ranging from e-commerce development to basic store count reductions.

A study by Moody’s Investors Service found the minimum lease obligations for a group of 62 U.S.-based retailers — all either publicly traded or holding public debt — will drop to $133 billion in 2018 from $203 billion this year as leases expire. The median for this group is a reduction to $1.2 billion in 2018 from $1.6 billion this year.

The overwhelming majority of these expiring rent agreements are expected to be renewed and the stores operating under them to remain open. But the rapid growth of e-commerce and the slowing pace of store expansion suggest a possible reallocation of capital, according to Jason Cuomo, lead author of the study and Moody’s vice president and senior accounting analyst.

“We haven’t looked at these numbers this way previously and there’s nothing to suggest that the reductions are that much different than in the past,” he told WWD. “What is different is that, in the last five years, retailers have seen so many more consumers do their shopping and buying through their smartphones and in other ways online. There’s likely to be a greater propensity for retailers to let leases expire and use some of that money to address online opportunities.”

Moody’s cited U.S. government and National Retail Federation data showing that e-commerce sales have grown to 6 percent of total sales from 5 percent two years ago while, during that same period, the pace of store growth has slowed to less than 3 percent a year from more than 12 percent.

Meanwhile, with their eyes on the online marketplace, stores including Sears Holdings Corp. and Staples Inc. have moved ahead with plans to scale back their store counts by nearly 10 percent or more and other retailers, such as Office Depot Inc. and RadioShack Corp., have similar plans.

Office supply stores have the fastest rate of upcoming lease expirations of the sectors studied, but numerous broadline and apparel retailers also will have wide-open real estate options, and opportunities to reduce their leverage, in the next 48 months.

Wal-Mart Stores Inc. will see its minimum lease obligations drop to $9.5 billion in 2018 from $13.9 billion this year, a 31 percent decline, while The TJX Cos. Inc. will see a 42 percent reduction, to $5.9 billion from $10.2 billion. Gap Inc.’s obligations will drop 47 percent, to $4.7 billion from $8.8 billion, while Sears’ will decline 58 percent to $2.3 billion from $5.5 billion.

Cuomo pointed out that a reduction in square footage might be accomplished by some retailers without a corresponding decline in store counts.

“Retailers should be asking themselves not only if they need particular stores, but if they could more effectively operate in smaller units, such as by opening small fulfillment centers to complement what they’ve done to build their e-commerce volume,” he said. “The question becomes, ‘Where do we need to be?’”

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